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Income redistribution

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Income redistribution through taxes and transfers

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Income redistribution

  1. 1. Income redistribution through taxes and transfers across OECD countries Main findings and policy implications
  2. 2. Taxes and transfers redistribute income from richer to poorer households in all OECD countries, lowering inequality -60 -40 -20 0 20 40 60 1 2 3 4 5 6 7 8 9 10 % of disposable income Decile Transfers Personal income taxes incl. SSC Net transfers OECD average, working-age population,2014 or latest available year Source: Causa and Hermansen (2017)
  3. 3. But the equalising effect of taxes and transfers varies widely across the OECD ... even for similar levels of inequality before TT e.g. inequality post-TT lower in Ireland than Greece, lower in Norway than Japan despite similar pre-TT inequality Working-age population, 2014 or latest available year Source: Causa and Hermansen (2017) 0 5 10 15 20 25 30 35 40 45 50 10 15 20 25 30 35 40 45 50 55 60 CHL KOR CHE JPN NZL USA ISR LVA EST CAN GBR AUS ITA OECD32 ISL ESP SWE NLD DEU POL SVK NOR PRT GRC CZE FRA LUX AUT DNK BEL SVN FIN IRL MEX TUR HUN PercentageGini coefficient Inequality before taxes and transfers Inequality after taxes and transfers Redistribution (in %, right axis)
  4. 4. The approach for measuring redistribution • How is redistribution defined and measured? By comparing household income inequality (Gini coefficients) before and after taxes and transfers: 𝑅𝐸 = 𝐺 𝑚𝑎𝑟𝑘𝑒𝑡 − 𝐺 𝑑𝑖𝑠𝑝𝑜𝑠𝑎𝑏𝑙𝑒 𝐺 𝑚𝑎𝑟𝑘𝑒𝑡 • Micro data allow for identifying/separating the respective inequality-reducing effect of various fiscal instruments: • Cash transfers • Insurance (e.g. unemployment & sickness benefits) • Assistance (e.g. social assistance, means-tested) • Universal (e.g. family and child benefits) • Personal income taxes and employee’s SSC
  5. 5. In all OECD countries cash transfers account for the bulk of redistribution Share of total redistribution, working-age population, 2013 or latest available year Source: Causa and Hermansen (2017)
  6. 6. Size of transfers matter, but countries also differ in targeting to low-income households Working-age population, 2014 or latest available year Source: Causa and Hermansen (2017) 0 5 10 15 20 25 30 35 40 45 50 NZL AUS FIN NLD DNK GBR SWE DEU CHE CAN MEX NOR BEL ISL IRL CZE OECD KOR USA ISR SVN EST FRA SVK HUN JPN TUR AUT LVA CHL POL LUX ESP PRT ITA GRC Percentage Share of total transfers to bottom quintile Total transfers in % of total market income
  7. 7. Redistribution has declined for almost all available OECD countries since the mid-1990s… Source: Causa and Hermansen (2017) 0 10 20 30 40 50 -20 -15 -10 -5 0 5 ISR SWE FIN DNK NZL CAN OECD16 USA AUS NLD DEU FRA GBR JPN CZE ITA NOR PercentagePercentage points Change in redistribution Redistribution 2014 or latest year (right axis) Working-age population, mid-1990s to 2014 or latest available year
  8. 8. The decline in redistribution was largely driven by transfers, in particular insurance transfers Source: Causa and Hermansen (2017) -14 -12 -10 -8 -6 -4 -2 0 2 4 6 FIN ISR SWE 1 DNK AUS NLD CAN CZE USA GBR FRA 2 NOR DEU OECD13 Percentage points Transfers Personal income taxes incl. SSC Personal income taxes SSC Total -10 -8 -6 -4 -2 0 2 4 6 8 FIN DNK AUS GBR CZE FRA 2 USA DEU OECD8 Percentage points Insurance transfers Universal transfers Assistance transfers Total transfers Working-age population, mid-1990s to 2013 or latest available year A. Change in total redistribution B. Change in transfer redistribution by type
  9. 9. Reforms to personal income taxes had a much smaller impact Source: Causa and Hermansen (2017) Change in size and progressivity of PIT and SSCs paid by the working-age population, mid-1990s to 2013 or latest available year -10 -8 -6 -4 -2 0 2 4 6 8 ISR AUS GBR FIN CZE DNK SWE1 USA CAN FRA2 DEU NOR NLD OECD13 Percentage points Size Progressivity Redistribution
  10. 10. • Redistribution has fallen across the OECD, but why? • What are the policy drivers of such decline? • Can we disentangle those from changes in market income inequality and population structure? – e.g. more redistribution if higher unemployment, or more workless families and dual-earner couples • What are the influence of megatrends in particular globalisation? Why are tax-transfer systems doing less redistribution?
  11. 11. The approach in a nutshell Two complementary approaches to identify the policy drivers of changes in redistribution: 1. Empirical regression analysis (Causa et al 2018): relying on cross-country time-series analysis to identify major policy drivers of RE among a broad set cyclical and demographic drivers alongside structural changes; covers the last two decades 2. Microsimulation analysis (Browne and Immervoll, forthcoming): relying on microsimulation analysis to decompose observed changes in RE into specific TT policy changes at the country level and “other” changes (i.e. in population structure and market income inequality); covers a more recent period
  12. 12. Main findings • Microsimulation and regression-based analyses suggest that policy changes during the past two decades have contributed markedly to the decline in redistribution:  A reduction in the taxation of top incomes and income from capital, as globalisation has put pressure on governments to shift away from highly mobile tax bases. This has reduced PIT progressivity in the upper-part of the distribution.  A decline in the generosity and duration of unemployment-related transfers, including cuts to social assistance for the long-term unemployed.  Pension and early retirement reforms to encourage longer working life, for instance increases in the age of full pension eligibility and reductions in replacement rates. • Not all policy changes went in the direction of reducing redistribution: at lower earnings levels, income taxes have frequently become more redistributive as taxes have been reduced for low-income working families.
  13. 13. Openness and tax redistribution -4 -2 0 2 4 6 8 3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 5.0 5.2 5.4 5.6 5.8 6.0 Openness ratio (in log) Change in redistribution (%) associated with a 1 percentage point increase in the PIT-to-GDP ratio Increased economic integration has tended to reduce the redistributive effect of tax revenue raised from PIT Note: Regression analysis. This figure shows the estimated effect of the PIT-to-GDP ratio on redistribution as a function of country’s level of trade openness. Dotted lines indicate confidence intervals. Source: Causa et al (2018)
  14. 14. -40 -30 -20 -10 0 10 20 30 Unemployment benefits Social assistance Family benefits Housing benefits Income tax Social security contributions Note: Microsimulation analysis. This figure shows the change in benefit level as % of median income over a 24 month unemployment spell. Weighted average over four family types, three different employment records and four different previous earnings levels, each with and without entitlement to cash housing support. Source: Browne and Immervoll, forthcoming. Policy reforms reduced redistribution among workless families Change in average benefit level as % of median household income, 2001-15
  15. 15. But policy reforms increased redistribution among (most) working families Policy effect by percentile point of the earnings distribution -3% -2% -1% 0% 1% 2% 3% 10 20 30 40 50 60 70 80 90 Gain/lossasapercentageofincome Earnings percentile 2001-07 'Stimulus' period 'Austerity' period 'Post-austerity' period 2001-15 Note: Microsimulation analysis. The figure shows the unweighted average impact of policy reforms on net incomes over 28 OECD countries. Within each country, policy impacts are calculated as a weighted average over 8 family types (single with no children, single with 2 children, couple without children, couple with 2 children, each with and without entitlement to cash housing support). Percentile points between the nine decile points are linearly interpolated. Source: Browne and Immervoll, forthcoming.
  16. 16. Illustrative reform scenarios
  17. 17. Illustrative tax reform scenarios Increases in the top marginal rate on personal income and employees’ SSC Increases in the net personal tax on dividend income 0.0 2.0 4.0 6.0 8.0 10.0 12.0 PRT SVN GRC BEL FIN SWE JPN DNK DEU FRA NOR GBR LUX NLD ESP IRL ISL KOR AUT ISR CAN CHE AUS ITA USA CHL POL TUR SVK MEX HUN NZL CZE EST LVA % Closing the gap with the OECD median Closing the gap with the OECD upper-quartile 0 1 2 3 4 5 6 7 8 IRL FRA DNK KOR CAN ISR GBR SWE AUT BEL NLD SVN USA FIN PRT AUS ESP NOR DEU CHL ITA CHE JPN ISL LUX POL TUR MEX HUN CZE GRC LVA NZL EST SVK % Closing the gap with the OECD median Closing the gap with the OECD upper-quartile Reform-driven changes in redistribution for the working- age population Note & source: Estimated change in redistribution from closing the policy gap with the median or the upper quartile of OECD countries, depending on countries’ relative starting point. The direction of the policy change is chosen so that the income redistribution effect is positive. Simulations based on regression results in Causa et al (2018)
  18. 18. Illustrative transfer reform scenarios Reform-driven changes in redistribution for the working- age population Increases in long-term unemployment-related transfers for low-income married couples (including social assistance) Increases in public spending on childcare and early education 0 2 4 6 8 10 12 14 16 IRL CHE NLD FIN LUX JPN ISL NOR SWE DEU FRA AUT LVA SVK NZL ISR AUS CAN CZE GBR SVN POL DNK EST BEL ESP PRT KOR HUN USA CHL GRC ITA TUR % Closing the gap with the OECD median Closing the gap with the OECD upper-quartile 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 ISL SWE DNK FRA NOR FIN NZL HUN KOR DEU ITA SVN ESP IRL BEL AUT ISR LUX GBR CHL SVK CZE POL NLD AUS EST PRT JPN USA MEX TUR % Closing the gap with the OECD median Closing the gap with the OECD upper-quartile Note & source: Estimated change in redistribution from closing the policy gap with the median or the upper quartile of OECD countries, depending on countries’ relative starting point. The direction of the policy change is chosen so that the income redistribution effect is positive. Simulations based on regression results in Causa et al (2018)
  19. 19. Policy implications • Given that income inequality has increased both before and after taxes and transfers, the boost to job creation and employment from make-work-pay policies that have lowered redistribution has not been sufficient to prevent a rise in inequality. • Yet tax and transfer policies can do much to promote efficient markets and inclusive outcomes. Countries can learn from successful reform strategies that have leveraged policy synergies between equity and efficiency objectives. In particular, carefully designed in-work taxes and benefits and credits can boost employment levels among target groups and reduce inequality. • Policy changes should ensure that redistribution is achieved in the most efficient way and take into account the rapidly changing context in which policies operate. Social protection reforms should seek to expand the coverage of unemployment benefits, not least to address policy challenges raised by changes in the nature of work. Social assistance reforms should seek to enhance the targeting of cash transfers to low-income households. • A comprehensive strategy for tackling inequality should include policies promoting greater equality of opportunities through access to high-quality education, healthcare, affordable housing and lifelong training programmes.
  20. 20. References 2 0 • Causa, O. and M. Hermansen (2017), “Income redistribution through taxes and transfers across OECD countries”, OECD Economics Department Working Papers, No. 1453, OECD Publishing, Paris, http://dx.doi.org/10.1787/bc7569c6-en. • Causa, O., A. Vindics and O. Akgun (2018), "An empirical investigation on the drivers of income redistribution across OECD countries", OECD Economics Department Working Papers, No. 1488, OECD Publishing Paris, https://doi.org/10.1787/5cb47f33-en. • Causa, O. , J. Browne, J. and A. Vindicis (2019), “Income redistribution across OECD countries: main findings and policy implications”, OECD Economics department Policy Papers No. 23 • Browne, J. and H. Immervoll ,“Have tax and transfer become less inclusive? Results from a microsimulation analysis”, OECD Social, Employment and Migration Working Papers, forthcoming.

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